Accounting for Business

ACCOUNTING FOR
BUSINESS
STUDENT ID:
[Pick the date]

PART A
a) 1) Current Ratio – This is a measure of liquidity in the short term and provides an estimate
of the ability of company to settle the current liabilities by relying on current assets.
2) Quick Ratio: Short term liquidity is also measured through this ratio which outlines the
ability to settle current liabilities based on liquid current assets only.
3) Accounts Receivable Turnover – It measures an aspect of operational efficiency i.e. the
time within which on average the company would realise cash on the credit sales made.
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4) Inventory Turnover – It measures an aspect of operational efficiency i.e. the time within
which on average the company would realise sale from the purchased inventory.
b) Liquidity – Two measures aim to represent short term liquidity for the company namely
current ratio and quick ratio. The current ratio of the company has shown significant dip in
2019 which implies worsening liquidity position. However, the same is not indicated in
quick ratio where marginal improvement in2019 is registered over the 2018 levels.
Currently there is no concern as despite the fall in the current ratio, the two ratios for 2019
are quire healthy and do not hint at any cash crunch but any more fall going forward
might change this conclusion (Watson and Head, 2015).
Operational Efficiency – On both counts i.e. inventory turnover and receivables turnover,
the company in 2019 has made significant strides. This is apparent from the significant fall
in inventory turnover days and receivable collection days that have been registered in 2019
when compared with corresponding values in 2018 (Damodaran, 2015). However, still the
operational efficiency of the company continues to remain inferior. The inventory turnover
days in 2019 (176 days) is substantially larger than the corresponding industry average
(104 days). Also, the average collection days for receivables continues to exceed 30 days
despite the official credit period of 30 days provided to creditors. The company needs to
make rapid strides in these aspect or it would not be able to compete with peers owing to
high working capital requirements (Ehrhardt and Brigham, 2014).
PART B
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